Who Is Responsible for Paying Your Estate Tax Bill?
Not many estates have to worry about paying federal estate tax bills because the exemption is significant —$5.49 million as of 2017. Only estates valued at more than this are subject to the tax on the portion of the estate's value that exceeds this amount.
Estate taxes at the state level are a different story. Among the 15 states plus the District of Columbia that impose this tax, all offer significantly smaller exemptions.
If your estate is taxable for state or federal estate tax purposes, someone is going to have to prepare, sign and file the estate tax return. Someone is going to have to pay the bill. Will it be your personal representative, successor trustee, or each individual beneficiary?
The answer depends on whether your estate is subject to probate or you've formed a living trust.
What Happens If Your Estate Is Subject to Probate
The personal representative or executor will sign the check to pay the taxes using estate funds if your estate is subject to probate. She's responsible for preparing and filing your estate tax returns for the Internal Revenue Service and state taxing authorities.
If The Estate Doesn't Require Probate...
Given current exemption thresholds, it's highly unlikely that your estate would be liable for estate taxes if you don't have an estate plan and your estate is too small to require probate. In most states, small estates are not subject to full-blown probate because they qualify for a summary or simplified procedure for transferring a decedent's property.
Larger estates still require probate even when the decedent dies without a will or an estate plan because probate is the only legal mechanism by which ownership of his property can move to living beneficiaries. In this case, the court will appoint an administrator rather than a personal representative or executor in the absence of a will, and the administrator is still responsible for dealing with and paying estate taxes from the estate.
If You Have Both a Will and a Trust...
Part of your estate is also subject to probate if you have a pour-over will and a revocable living trust. The pour-over will direct that any assets owned by you at the time of your death should "pour over" and transfer to your trust. Although property already held in your trust does not require probate, these omitted assets must be probated so they can move to your trust.
In this case, the successor trustee of your trust will most likely be responsible for filing your estate tax returns with the IRS and the state taxing authorities. He will pay the tax from the trust's assets and income. Your successor trustee is the individual you've named to take over management of your revocable living trust in the event you become mentally incapacitated or die.
An Important Distinction
In some fairly isolated cases, probate is not required because everything of value owned by the decedent passes directly to beneficiaries by contract or operation of law. This would include real estate owned by someone else with rights of survivorship, or life insurance proceeds and retirement benefits. If the value of all these assets exceeds federal and state estate tax exemptions, the beneficiaries may be responsible for any taxes that are due. If you find yourself in this situation, get advice from an accountant or an estate attorney immediately to find out how best to proceed and to determine the extent of your liability.
Despite the fact that responsibility for paying estate taxes often falls to the executor of an estate, the probate estate alone does not determine whether estate taxes are due. A decedent's taxable estate includes everything he owns or has an interest in at the time of his death—including insurance proceeds or real estate that pass outside probate by contract, deed or operation of law. When probate property is minimal but these other assets have significant value, it's entirely possible that the probate estate would be unable to pay any estate taxes that are due—it simply would not have sufficient funds.
This is just another reason why having an estate plan in place is so important. If you're planning your estate, consult with a lawyer to avoid this possibility. If you're trying to settle an estate where this is the case, you'll need the help of an attorney, an accountant or both.